Asian Economies: A Brief Survey

Asia’s business life is imprinted by large contrasts. Several Asian countries are among the world’s ten poorest countries, while other Asian countries are among the richest in the world.

The most developed countries in Asia are located in the East and the Southeast region. This region contains countries, which since the 1960s have had the most rapid economic growth in the world. Taiwan, South Korea, Hong Kong and Singapore have doubled their GDP approximately every eighth year since 1960, and are by some, considered fully developed.

At the end of the Second World War Asia’s influence on the world economy was marginal. The first decades of the postwar period, Asia seemed to be stuck in an undeveloped stage, without much hope to make things better. The different Asian countries would have to actuate necessary reforms to improve their economic situation and begin a positive development.

The last decades, Asia has been in a rapid economic and political transformation. It has presented itself as the world’s most powerful growth region (Filseth¹, 2009).

The economic situation of each Asian country will be presented below, along with their most central stock exchanges, with emphasis on dominating sectors and significant companies (selection of countries based on MSCI Barra’s All Country Asia Ex Japan Index ).

China

China has had one of the world’s highest growth rates, since the country in 1978 decided to modernize the old centrally planned economy. From 1978 to 2003, China’s GDP (in comparable prices), has been sextupled. In the same period, the GDP per capita has on average grown by 8.2 % per year. China has, with its size and rapid growth, become an economic factor of power in the world. At the same time, the country is considered to be among the emerging countries. Even though the growth rate has been high, the Chinese economy still shows signs of structural problems with an imbalanced development, large regional differences, supply problems, inflation pressure, corruption, weak legal protection, camaraderie and closed political processes.

After the establishment of the People’s Republic of China, in 1949, the country led a centrally planned economy, based on the Soviet model. During the “Great Leap Forward”

4 (1958 - 1960) and the Cultural Revolution (1966 - 1976) China experienced serious setbacks.

In 1978 market economic reforms were introduced. At the same time, the strict political control, led by the Communist Party, was maintained. The reforms involved modernizing within agriculture, manufacturing industry, science and defense. Up until 1990, certain industries, within certain economic zones and selected cities were gradually opened for foreign direct investments. The first four coastal special economic zones were established in strategic locations; Shenzhen on the border to Hong Kong, Zhuhai on the border to Macao, Shantou with cultural connections to Chinese people living in the South-east Asia and Xiamen with cultural connections across the strait from Taiwan. The reform measures immediately led to rapid economic growth for some years, until the end of the 1980s. After the year 1992, the rapid growth picked up again after new in-depth reform measures were carried out, like the authorization of privately owned companies. The goal was to establish a strong private sector under macroeconomic control, but where the political and social development still would be under the control of the Communist Party, with the label “socialistic market economy”.

The government of China has directed a lot of its investments towards establishing infrastructure and buildings in other areas in China than the three regional economic power bases (the Pearl River Delta, the Chang Jiang Delta and the Bohai Sea). This is being done to try to channel growth from the coastal areas to the middle and western regions in the country.

The most noticeable developmental factors in the Chinese economy since 1978 have been the growth and development in the service sector. From being given the lowest priority, the development of the commodity trade, the banking, insurance and financial industries and the hotel and restaurant industries, has been an important factor in the development of China as a modern country. The service sector is still developing to adjust to the international standards and quality measures.

China is traditionally an agricultural country and in 2003 the agricultural sector accounted for 15 % of the country’s GDP. The total cultivated area includes approximately 16

% of China’s total area, while exploitable meadow and grazing land includes 33 %.

China has grown to be the world’s superior fishing nation with a total catch of 47 million tons of marine products in 2003. This equals approximately ¹/3 of the world’s total take. China is also one of the world’s largest producers of mineral resources. China alone stands for 42 % of the world’s coal production (2004). When it comes to energy, China has become a very important participant in the world’s energy market. In 2003 China (including

5 Hong Kong) accounted for 13.5 % of the world’s energy production and 12 % of its consumption. China is however not self-supported with energy and is dependent on the import of oil.

The manufacturing sector has developed a lot since the reform started in 1978. Today China is among the leading countries of production in the world when it comes to many different products, especially the labor intense products. As an example, China produces more than half of the world’s toys, bicycles and footwear (Næverdal¹, 2009).

Prior to 1978 China was a minor participant in the world trade, but after 1978 the country has developed into becoming a very important global participant, and is today one of the leading trading nations. Asian countries account for half of China’s exports and are the source of ²/3 of the imports (Redaksjonen¹, 2009).

During the reform the infrastructure was highly developed. Still, the infrastructure in China has to be considered as underdeveloped, and it therefore acts as an obstacle in the further economic development. The biggest weaknesses lie in the energy network, transport and telecommunications (Redaksjonen², 2009). Still, as of 2008 China’s GDP amounted to dramatic decrease in the profitable trade that Hong Kong had with China. As a replacement for this loss, Hong Kong industrialized heavily with export products that came to be known worldwide. On the first of July 1997, the transfer of sovereignty of Hong Kong, from the United Kingdom to the People’s Republic of China, took place. China takes care of Hong Kong’s foreign policy and defense and has the last saying in all important matters. Hong Kong still has its own foreign trade and its own currency, the Hong Kong Dollar, which is fully convertible and fixed against the USD. Hong Kong has the right, regulated by contract, to keep its own capitalistic system and social order with all its rights until year 2047.

6 Hong Kong’s government and business life have been searching for closer integration with South China ever since the millennium. The Guangdong province and the Pearl River Delta are important markets for Hong Kong’s service based economy. The strong economic growth in China, combined with China’s WTO-membership in 2003 has given Hong Kong new opportunities. Despite competition from Guangzhou and Shenzhen, Hong Kong seems, with its first class infrastructure, well functioning administration and impartial legal system, to be able to do well in the future as a leading economy in Southern China.

Both the Hong Kong airport and the harbor have played important roles for Hong Kong, since it has been crucial for Hong Kong to be able to offer first class service when it comes to air traffic and shipping, especially when the competition from other regions, like Shanghai and Singapore, are increasing. Many foreign companies choose Hong Kong before other regions to invest because Hong Kong has a reputation of being one of the least corrupt places in this part of the world. Only beaten by China, Hong Kong has been the largest receiver of foreign direct investments (FDI) in Asia, for many years. In 2007 the FDI’s amounted to USD 59.9 billion, which was more than Singapore, Thailand and India received combined.

Hong Kong was hit hard by the Global Financial Crisis (GFC) and the economy went into recession in November 2008. In the first quarter of 2009 the GDP shrunk with 7.8 % compared to the same quarter in 2007. The GFC seems to have hit Hong Kong harder than the Asian Financial Crisis in 1997 (Filseth², 2009).

From the 1950s to the 1970s the dominating sector in Hong Kong was the manufacturing sector, while from the 1980s until 1997 the dominating sector was the financial sector. The sector that has been dominating in Hong Kong after 1997 is the service sector.

This has been led by two subsectors, the business and financial services sectors which together account for half of all economic activity. In 2008 Hong Kong had a GDP of US$307 billion (World Bank¹, 2008).

India

India is among the largest economic powers in the world, at the same time it is also among the world’s poorest countries (GDB per capita). India has had a solid economic growth since the end of the 1990s and during 2005 India was rated as the world’s tenth largest economy. The reasons for the economic growth is significant growth in the production industry, a large advance in the IT sector, quite liberal economic policy and a large increase in foreign

7 investments. Agriculture is still the most important sector in India (employs approximately 60

% of the population) and the Indian society is marked by huge differences in wealth. During the 1990s a radical reform process directing the economy towards market economy was started. Adaption to foreign investments and increased export of Indian commodities was central in this process. The reform process is being supported by the World Bank. In 2009 approximately 28 % of India’s 1 147 million citizens live below the poverty level.

The most dominating sector is as mentioned agriculture. Fishing is a sector in India that has shown significant growth and has theoretically huge expansion opportunities. The mining industry in India is significant, but the two most important commercial energy sources for India are oil and coal. The manufacturing industry employs approximately 13 % of India’s labor force and contributes approximately to 29 % of India’s GDP and the largest subsector is the cotton industry. The reform process has given the manufacturing industry a lot better conditions and has contributed to modernizing this sector.

The state of India has since the 1990s organized their set of rules to promote imports and exports of commodities and in 1991 India and China resumed their business connection.

India is a significant exporter of polished diamonds and diamonds and other precious stones are India’s most important export article. Other important export articles are cotton textiles, machines and transport equipment along with leather and the export of software services and employees with software expertise. India’s imports are dominated by oil and oil products. The US, Japan and Great Britain are India’s most important business partners (Redaksjonen³, 2009).

As of 2008 India’s GDP amounted to approximately USD 3 359 billion, being the fourth largest economy in the world (World Bank¹, 2008).

Indonesia

During the 20^th century production of tin, timber, oil and rubber made up a fundamental part of the economy. However, the subsistence agriculture has been the principal occupation of many Indonesians. Indonesia is very rich in resources such as oil, coal and other industrial raw materials, but the industry development has been slow. Following the crisis 1964 - 1966 the new president Suharto introduced the “New Order” to stabilize the economy. Further economic planning was introduced, which included fiscal and credit restraints, liberalized foreign investment laws and rescheduling of internal debts (Encyclopedia of the nations¹, 2010).

8 During Suharto’s thirty year reign the GDP per capita grew from USD 70 to over USD 1 000 by 1996 (World Bank², 2008).

In line with the OPEC agreements Indonesia had to reduce its production of oil, which at that time was the chief export of the country. Together with the worldwide recession in the early 80s this restrained the government’s resources. In order to reverse Indonesia’s worsening economy, new policies which encouraged foreign investment were designed. Some of the actions being made were specific structural reforms, major banking deregulations, privatization of the Jakarta Stock Exchange and increasing participation of the private sector debts (Encyclopedia of the nations¹, 2010).

The Asian Financial Crisis struck Indonesia in 1997 and within a year as many as 75 – 80 % of all businesses in Indonesia were technically bankrupt. Bail-out packages were arranged with standby agreements and loans from the International Monetary Fund, the United States, the World Bank and the Asian Development Bank. The crisis increased Indonesia’s debt from 25 – 27 % of GDP in 1997 to 102 % of GDP in 1999.

Today Indonesia has the largest economy in Southeast Asia and is a member of the G20 major economies (HM Treasury, 2009). It is one of the emerging markets of the world and as of 2008 it had a GDP of USD 907 billion (World Bank¹, 2008). The main export goods are textiles, oil, gas, rubber, electrical appliances and plywood. The labor force is divided into agriculture (42.1 %), industry (18.6 %) and services (39.3 %) (CIA¹, 2010).

Korea

When Korea was divided, the southern part of the country was mainly an agricultural area.

Most of the industry was in the northern part, along with the main part of the country’s significant minerals to be found. Until the mid 1960s, the standard of living was higher in North Korea than in South Korea. Since the 1960s, South Korea has secured a fast economic development. They have established a flourishing export industry, with focus on consumer electronics, semiconductors, cars, steel and petrochemical products, partly funded by investments and loans from Japan. The economy in South Korea is a market economy with a high level of governmental control. With a constant high economic growth rate since the 1960s, South Korea entered a period, in the early 1990s, with a lower rate of growth.

Increasing salaries from 1988 - 1993 led to a decrease in South Korea’s competitive power.

They were also hit hard by the Asian Financial Crisis in 1997, and the unemployment rate reached 8 %. Daewoo Motors were in year 2000 hit by the largest bankruptcy in the history of

9 South Korea, with a total debt of USD 70 billion. After the millennium the economic growth rate was high again and already in 2001 the unemployment rate was reduced to 3 %, which lasted the following years.

Agriculture was the dominating sector, and employed as late as in 1966 56 % of the workforce in South Korea. In 2002 the primary industries (agriculture, fishing and forestry) only accounted for 10 % of the employment and as little as 4 % of the GDP. The main pillar in the economy is the highly export orientated manufacturing industry. The value of the commodity export accounted for 37.7 % of the GDP in 2002 (equivalent number for the US and Japan are approximately 10 %). The manufacturing industry accounted for 28 % of South Korea’s employment and 40.9 % of the GDP in 2002. The car industry is significant in South Korea, with Hyundai in the lead. More and more of the production base is being moved to other countries, not only to China, but also to other low cost countries in Asia, as well as to Europe and America. after 1992, when the diplomatic connections between the two countries were re-established.

Japan and the US are the two most important countries for the South Korean imports as well (Redaksjonen⁴, 2009).

As of 2008 South Korea’s GDP amounted to approximately USD 1 344 billion, being the thirteenth largest economy in the world (World Bank¹, 2008). MSCI Barra has classified Korea as one of two countries that is currently under review for a potential reclassification to being considered as a developed market (MSCI Barra¹, 2010).

Malaysia

Malaysia has a growing and relatively open market economy. In 1955 Malaysia introduced the First Malayan Five Year Plan. The colonial British government had used all available resources to fight the Malayan communist insurgency and there was a need for resources to develop agriculture and infrastructure. These plans were used to intervene in the economy and redistribute wealth and investment in infrastructure projects and rural improvement. Until the

10 1970s Malayan economy was largely based on mining and plantation activities, the largest export products were tin and rubber. During the 1970s Malaysia committed itself to convert to manufacturing instead of mining and agriculture and thereby following in the footsteps of the Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan). The country’s economy flourished and Malaysia added more products to its export list, such as petroleum, natural gas, tropical hardwoods, palm oil and manufactured items (Encyclopedia of the nations², 2010).

This diversification made Malaysia less dependent on overseas commodity markets. The Malaysian economy took a hit in the 1981 - 1982 worldwide recessions. The commodity prices fell and the economic growth slowed down. The government stimulated the economy through spending on heavy industry which led to an increase in foreign debt. Malaysia’s period of high growth was again halted in 1985 - 1986 when the palm oil and oil prices were halved. After this period the economic growth continued with an average annual growth of 8 - 9 %. After 13 years of uninterrupted growth the Asian Financial Crisis put a stop to this and Malaysia’s GDP was -7.4 % in 1998 items (Encyclopedia of the nations², 2010). The government’s response to the crisis was to launch a massive recovery program which included two fiscal stimulus packages and the establishment of three special purpose agencies.

Malayan banks were also merged into 10 anchor banks and the domestic brokerages were merged into 15 universal brokers in order to compete with international counterparts. Since the crisis the Malaysian economy has continued to recover apart from a setback due to the aftermath of the terrorist attacks on the United States September 11, 2001.

As of December 2008 Malaysia has a GDP of USD 384 billion which makes it the 28^th largest economy in the world (World Bank¹, 2008).

The Philippines

After the Second World War the Philippines were believed to become an economical power in Asia. The country was an ally of the United States, it had a good workforce and natural resources. The future looked bright and in the 1960s the Philippine income per capita were double that of Thailand. However, the economical growth that was predicted never really happened, and today Thailand has almost twice the income per capita compared to the Philippines. One of the reasons for this was the corrupt regime of Ferdinand Marcos, he was president of the Philippines from 1965 to 1986. During his regime the economy grew at a significantly slower rate and the economy was destabilized. Marcos embezzled and misappropriated vast amounts of national wealth and he led his country into poverty. Another reason for the failed economy is the fact that the Philippines were under Spanish rule for

11 several hundred years followed by a 50 year spell of American occupation. This created enormous estates controlled by a few families and this has restricted the economic growth. In order to secure long term economic growth, new reforms and economic liberalization is vital.

The families controlling the land have so much power both politically and economically and therefore major changes are unlikely to happen (Economywatch¹, 2009).

According to the World Bank the Philippines are the 36^th largest economy in the world with a GDP of USD 317 billion which makes it the 4^th largest economy in South East Asia (World Bank¹, 2008). The main export articles include transport equipment, garments, semiconductors and electronic products, petroleum products, coconut oil, copper products and fruits. The Philippines biggest trading partners are China, Hong Kong, Thailand, Japan, Saudi Arabia, Singapore, South Korea, Malaysia and the United States. As of 2008 the country’s

According to the World Bank the Philippines are the 36^th largest economy in the world with a GDP of USD 317 billion which makes it the 4^th largest economy in South East Asia (World Bank¹, 2008). The main export articles include transport equipment, garments, semiconductors and electronic products, petroleum products, coconut oil, copper products and fruits. The Philippines biggest trading partners are China, Hong Kong, Thailand, Japan, Saudi Arabia, Singapore, South Korea, Malaysia and the United States. As of 2008 the country’s